Adding value in real estate

By: J. David Chapman/November 21, 2019

Recently, veteran real estate professional Marc Weinmeister and I discussed real estate value. Location is as important as ever when determining the basic value of real estate. Regardless of a property’s location, there are always ways to enhance the value of that real estate. You can re-tenant it, improve it, repurpose it and you can rebuild it.

In rental and commercial real estate, value is created by the tenant. They pay rent, they preserve or denigrate the property, and they define the rate of return on the property by their payments and actions. A national tenant is preferable to having a local junkyard on the property. When selling property, a long-term, good-credit tenant is preferable to having a month-to-month, unknown tenant. So, you can often improve the value of a property just by improving the tenants. How do you get better tenants?

This brings us to our next option for adding value: improving the property. HGTV is full of renovators who add value in this way. They go into a derelict property, with a proper location, and make the appropriate changes to the property to get a better tenant. This can be as simple as paint and flooring, or can involve changing the façade and the interior configuration. In commercial real estate, it can include improved signage and access.

Repurposing a property involves fundamentally changing the use. An older motel can become small offices, a house can become an Airbnb, a large single purpose warehouse can become a collection of separate warehouses. With the addition of air conditioning and light, a warehouse can become an assembly plant. Office buildings can be converted back and forth from multitenant buildings into single tenant home offices. Apartments can become condominiums. The ways to repurpose real estate are endless and everchanging.

The most radical way to add value to real estate is to rebuild it! Oklahoma City and Tulsa are the poster children for this type of redevelopment on a small and very large scale. The new buildings downtown, the amazing parks, the river districts – all of these show that rebuilding can be a powerful way to reshape the community and the businesses of a city.

So – if you own or are interested in real estate, you might ask yourself: “What are my opportunities to add value to real estate?”

J. David Chapman is an associate professor of finance and real estate at the University of Central Oklahoma (jchapman7@uco.edu).